Friday, October 17, 2008

Cheerleader Warren Buffett Warns On Inflation

Warren Buffett, whom I consider to be part of the new American Oligarch class, has written an Op-Ed piece that is published today at NYT.

In the piece, Buffett takes on the role of cheerleader for the American stock market. He tells us that for the first time he is buying stocks for his personal account.

Buffett's argument in favor of buying stocks is that in the long run they always go up--and he has the data from the 1930's to date to prove his contention. But the one thing Buffett does not point out in his article is that the current United States is much different from the United States of the 1930's to approximately the year 2000. During this period the United States was a growing, sprawling Empire. But, current day America is different. It is stretched thin. The Empire has debt owed to nations around the world. It has domestic obligations in the form of Social Security and Medicare that will soon haunt. And regulations grow on the creative business sector on a daily basis. This isn't the America Warren Buffett grew up in. It is unlikely the stock market will perform the same.

This does not mean there will not be opportunities for investors, but they will be different kinds of opportunities. Those who are quick to identify changes in macro-economic trends and find the stocks that benefit from those changes in trends will do extremely well. Those who truly dig into the fundamentals of companies and find the niche operators that outperform in the overall oppressive environment will also do well.

This does not mean that stocks in general won't go up, it will be a roller coaster period for them because of very strong inflation. The trick will be though to find the stocks that outperform the coming inflation.

Buffett understands very well that this inflation is ahead. He writes in his article:

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.

Truer words have never been written by an Oligarch to the general public.

No comments:

Post a Comment